The Hindu Business Line : Why India needs Iranian gas

New Delhi backing Brussels in the IAEA vote against Teheran could jeopardise the supply of gas by Iran to India. This India can ill afford because the gas would come at a very good price that New Delhi may not get elsewhere. Also, there is the question of energy security, for though many agencies have reported making finds in the Bay of Bengal, gas may not make landfall before 2008. Hopefully, Iran will give satisfactory clarifications, obviating the need for a final voting at the IAEA, and free India from its dilemma, says S. Narayan.

The Minister for Petroleum and Natural Gas, Mr Mani Shanker Aiyar, with his Iranian counterpart, Mr Bijan Zangeneh, during the signing of the pipeline agreement in New Delhi, in January... A dilemma for both? — Ramesh Sharma

THERE has been considerable debate over last week's International Atomic Energy Agency resolution wherein India supported the European Union-sponsored resolution to refer Iran's nuclear programme to the UN Security Council. The CPI (M) General Secretary, Mr Prakash Karat, has strongly condemned the action. Other non- aligned countries such as South Africa, Brazil, Nigeria and so on did not line up with the United States.

Foreign policy analysts, who support the stance taken by New Delhi, have argued that this would demonstrate that India is an ally and a responsible nuclear power and that there would be gains to India in the development of the peaceful nuclear programme that many years patient writing is likely to bear fruit now, and should not be thrown away.

Interestingly, Iran has issued a statement that it would not sever its economic relationship with India over the vote in the IAEA. While expressing disappointment, the comment was that "friends should not be judged by a single action", clearly indicating that there is an opportunity for New Delhi to redeem itself when the IAEA takes a final decision on November 25, the deadline given to Iran to clarify outstanding issues. There must be prayers on in South Block that the clarifications given by Iran by that date would obviate the necessity of the final voting, and not impale India on the horns of dilemma.

The question uppermost in everyone's minds is the fate of the Indo-Iranian gas supplies. During the visit of the Petroleum Minister in June, India signed a $22-billion deal with Iran for the supply of five million tonnes of LNG per annum beginning 2009-2010. During the visit of the External Affairs Minister to Teheran early in September, the two countries not only agreed to finalise a tripartite framework agreement on the tri-nation pipeline by the end of the year but Teheran also agreed to consider the Indian request for the export of another 2.5 million metric tonnes of LNG.

India is a huge and growing gas market. According to the Energy Information Administration, natural gas use was 25 billion cubic meters in 2002 and is projected to reach 40 billion cubic meters in 2012. Petronet LNG has a supply deal with Rasgas of Qatar for 5 million metric tonnes per annum. There have been significant gas finds in the Bay of Bengal, but actual exploitation dates are not available from the concessionaires, which include Reliance, Cairn Energy and ONGC. It is unlikely that any of this gas will make landfall before 2008. The Petroleum Minister has been making frenetic efforts at securing sources of oil and gas overseas, and he has been pushing Myanmar and Bangladesh for a pipeline to bring gas from Myanmar and has been pursuing oil opportunities with Kazakhstan, with limited success. The recently-concluded Dabhol agreement will now require its new owners to find the gas to run the plant, and no agreement is in sight yet. Petronet is constructing an LNG terminal at Kochi, and gas has yet to be contracted long term for use here. Finally, the Hazira terminal of Shell is able to source gas in the spot market, with no evidence of any long-term supply agreement.

It is in this context that the agreement with Iran assumes significance. World supply of natural gas is insufficient to meet long-term demand, which is growing, not only because it is a clean fuel, but also as it does not require costly refining and processing before it can be put to use. Iran has natural gas reserves of 26.6 trillion cubic meters, and the country produced only 76.5 billion cubic meters of natural gas in 2002. Most of the gas was consumed internally, though some quantities were exported to Armenia and Turkey. Iran is eager to reach other markets. In March, there were reports of a deal to export 10 billion cubic meters of gas annually to Oman, beginning 2006, and a similar quantity to Kuwait, beginning 2007. Iran is also exploring the possibility of exporting gas to Ukraine. Other countries that have had discussions with Iran include Austria, Bulgaria, China, Greece, Italy and Turkey. In all this, conclusion of the deal with India is very important for Iran, for it would curtail some of its political isolation and earn it a place in the international gas market. Among the two major growth countries of China and India, the geographical proximity of India makes the deal more prices efficient. In case Iran were to terminate the 25-year 5 MMTPA LNG deal, it would be a huge financial loss to India, because it would be almost impossible at prevailing prices to get a deal at prices anywhere near those agreed by Teheran. The LNG comes at an FOB (free-on-board) price of $2.90/mmbtu for an initial period of two years, beginning 2009-2010. After two years, the price will rise to $ 3.215/mmbtu. There is no actual escalation clause in the price, and had there been no ceiling on the price, the price could have been higher.

The India-Iran deal could come unstuck for reasons other than the India vote in the IAEA. If two European countries — France and Germany decide to independently approve sanctions against Iran (as the Americans have), the LNG project will have difficulty taking off. This is because besides companies in the US, two European manufacturers, Axen of France and Linde of Germany, are world leaders in gas liquefaction technology required to construct the liquefaction plants.

Analysts predict that LNG prices in Asia will rise more than 75 per cent over the next five years, and Asian buyers may pay more than $8/mmbtu FOB by 2010, from the average range of $4.5 FOB now. That Iran gave a very good deal to India is evidenced by the fact that, for the additional 2.5 MMTPA that India wants to buy, it is now demanding a significantly higher price — a ceiling of $3.60/mmbtu corresponding to a Brent crude price of $40 per barrel with an annual escalation of 2 per cent. Back-of-envelope calculations show that the Iran LNG deal is worth $20-22 billion over the life of the agreement, and India would end up paying much more if it were to look for the same deal elsewhere.

Petroleum Ministry officials are putting up a brave face that the June 2005 contract signed by IOC, GAIL and BPCL on the one side and the National Iranian Gas Export Corporation on the other, is intact and it would be difficult for Iran to back out of the contract. Clearly, India is in unenviable position of choosing to yield to US pressures or to reiterating their support for Iran. The stakes, in terms of energy security are high.

(The author is a former Secretary to the Ministry of Petroleum and Natural Gas.)

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